EA scores with shift to online play

Despite falling profits, EA's quarterly results should impress Wall Street as the company continues focusing its efforts on selling games over the Internet.

Nick Statt Former Staff Reporter / News
Nick Statt was a staff reporter for CNET News covering Microsoft, gaming, and technology you sometimes wear. He previously wrote for ReadWrite, was a news associate at the social-news app Flipboard, and his work has appeared in Popular Science and Newsweek. When not complaining about Bay Area bagel quality, he can be found spending a questionable amount of time contemplating his relationship with video games.
Nick Statt
4 min read

Madden NFL 15 was the second-best-selling game of 2014 and, despite its August release, still a strong sales driver for EA in its latest quarter. EA

Electronic Arts' focus on selling and delivering products over the Internet is paying off.

The video-game maker said Tuesday that half its revenue over the past year has come from selling games and add-ons through online platforms. That's a first for the company, said Chief Financial Officer Blake Jorgensen, who added that EA expects these types of sales to make up a larger percentage of the company's revenue in the future.

This change appears in several ways at the company. EA increasingly sells expanded story lines for its games, both in stores and through services for Microsoft's Xbox and Sony's PlayStation video-game consoles. It has also built services for its sports titles like FIFA soccer and Madden football, encouraging gamers to spend even more as they compete against one another and track week-to-week stats.

"We're trying to continue to shift the business model to more and more live services," Jorgensen said. The result, he added, is customers who spend more time, and money, playing a single game.

EA's success with Internet-delivered games mirrors the larger industry. In December, purchases of full game downloads and other game content, including in-app purchases on mobile devices, hit an all-time high of $1.2 billion, according to industry watcher SuperData Research.

"The difference between digital and retail is now no more than a rounding error," wrote SuperData CEO Joost van Dreunen at the time.

Still, not all is bright. The company reported that profits fell 2.5 percent and sales dropped 9 percent year over year, due mostly to the delay of one of its most highly anticipated titles, an urban war game called Battlefield Hardline. It had been planned for October 2014 but was delayed until March of this year.

Investors seem unfazed, however, and responded favorably to EA's earnings, sending its stock up 4.3 percent in after-hours trading. The company's stock has risen more than 103 percent in the last year, peaking at nearly $50 a share last week.

Rough road for retail

Though sales over the Internet continue to grab more of the pie for companies like EA, the retail end of the game industry has been struggling of late. Games sold on discs at retailers like Amazon, GameStop and others were slumping all last year, according to industry watcher the NPD Group. That's particularly worrisome considering Sony and Microsoft released new versions of their PlayStation and Xbox video-game consoles just before the 2013 holiday. Sales of the new hardware have been breaking records throughout the year, giving EA and other game makers a growing list of potential customers.

One new method the company has been using to sell games is called EA Access. The service charges players $5 a month or $30 a year to download and play older titles in the publisher's catalog. The catch: as with Netflix for television or Spotify for music, EA Access gamers don't own those games and can't trade them in for cash.

EA has yet to disclose the number of EA Access subscribers, but the company will increase advertising with Microsoft in the coming months. Since its August launch, EA has also made each new title available to subscribers five days prior to release for up to 6 hours, regardless of whether it ends up in EA Access in the future. The company said it plans to continue offering the chance to play every new title before a purchase.

Though EA is making the transition to online sales smoothly, it's still not so bullish on the prospects of the industry's more cutting-edge developments, like virtual reality. Companies like Oculus VR, which makes a prototype headset that teleports users to different worlds, have been a hot topic in gaming for years now. Virtual reality promises to take the immersive quality of games to whole new levels, but EA is still not quite convinced the technology is ready for its full attention.

"When you look at the expansiveness of our games or the speed of our sports games, the likelihood of motion sickness goes up dramatically," Jorgensen said. Of course, he noted, members of the VR community want EA to get involved, but because it's still early, the company has its eyes open but won't be making any commitments.

When adjusted for items like stock-based compensation and deferred revenue, EA reported profit of $1.22 a share on sales of $1.43 billion. That beat analysts' estimates of 92 cents a share on sales of $1.29 billion.

For the fourth fiscal quarter ending March 31, EA anticipates profit of 22 cents a share on sales of $830 million, after adjusting for items such as deferred revenue. Analysts on average estimate 26 cents a share on $912 million, according to surveys by Thomson Reuters.

EA has raised its fiscal year sales guidance by an additional $75 million, to $4.25 billion, and increased its annual earnings forecast per share by 30 cents, to $2.35.